A price retracement is underway, but milk production remains strong. The hope is that demand will continue to grow. Meanwhile, look for opportunities to protect your milk and feed prices.

The bullishness and steady uptrend in cheese prices since the beginning of the year came to a screeching halt last week.

Cheese prices virtually fell out of bed as sellers of cheese overwhelmed the market. The block cheese price fell 33 cents over the past week to post the largest loss over the duration of a week since June 2004. Barrels followed, but the loss was not as great posting a decline of 26 1/2 cents. Cheese prices are now at the lowest level since late January.

Many are again questioning the validity of the sell-off, with some discussion surfacing again about market manipulation and ideas that daily spot trading should not be the driver of milk prices. Right now, this is the best indicator we have. It is a reflection of the market since buyers and sellers are going to do business as they see fit. A price outside of the realm of the market in the country is not going to last very long. Yes, the market could move outside of what is happening in the country, but buyers and sellers will step up to the plate when business has to be done.

Ideas were floating around again that milk prices were going to remain high and move significantly higher as the year progresses. After all, we are still in the first quarter of the year. So, the shock of a severe decline in price is hard to take. Milk check are becoming as volatile as the market, with March Class III and Class IV milk prices about to set a record high for a March price. However, April Class III futures indicate a potential decline of nearly $3.00 per cwt. if cash prices remain where they are.

International demand has been good and has been one of the mainstays of the market. Price weakness on the last Global Dairy Trade (Fonterra) auction, however, has turned the tide a little. Daily nonfat dry milk trading had weakened slightly from the high, but continues to hold well. Evidence of international price weakness and some indication that supplies are beginning to loosen a bit in the country may result in powder prices weakening along with cheese and, more recently, butter.

It does not appear prices will decrease significantly, but a retracement is underway. The extent of that retracement is difficult to predict. It certainly is a buyer’s market, with no need to outbid someone else to obtain desired product. One thing we do know is that milk production is not slowing down.

The February milk production report showed an increase of 2.0 % over a year earlier over all 50 states. Despite high feed prices, farmers continue to get more milk out of the cows. It is not that more money is being made, as higher feed prices are met with higher milk prices -- essentially resulting in the trading of dollar for dollars. However, more production seems to always be the result of higher milk prices.

Production per cow in February increased 21 lb. while cow numbers remained the same from January at 9.16 million head. Cow numbers are up 68,000 from a year earlier. Of the top 23 milk producing states, only five posted a lower production number than a year earlier. These states were: Illinois, Minnesota, Missouri, Pennsylvania and Utah. The top milk producing state of California showed an increase in production of 2.4% while Wisconsin was up 0.5%.

It will take a while for the production train to slow down. Current feed and milk prices will not cause this to happen. The hope is demand will continue to grow both domestically and internationally, improving overall milk prices. In the meantime, all we can do is sharpen the pencils and look for opportunities to protect milk and feed prices on dips -- and milk prices on jumps.

Upcoming reports:

-February cold storage on March 22

-February livestock slaughter on March 25

-Commercial disappearance on March 29

-Agricultural prices report on March 30

-March class prices on April 1

-California Classes 4a/4b on April 1

-Dairy Products report on April 4

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.

Continued high milk prices and feed costs demand the use of risk management tools. One of those, the Livestock Gross Margin-Dairy insurance program, has been subject to misinformation.

Excitement in the dairy markets continues to build as the weeks unfold. Nonfat dry milk prices were the leaders of the market for some months, pulling cheese prices higher. The wide spread between Class III and Class IV needed to be closer, demanding that the cheese prices increase in order to remain competitive. This was taking place while butter price remained stable and actually decreased for a time.

Recently, nonfat dry milk price decreased slightly and has remained stable. However, this has not yet had any impact on cheese prices. Cheese buyers have been purchasing what has come to the spot market and continue to look for more. It seems there is a shortage, but all indications suggest there is sufficient cheese to meet demand, with more going to storage. Each monthly cold storage report shows increased stocks, despite reports of good demand both in the U.S. and overseas.

All this means good milk prices for dairy farmers. The February Class III price was announced at $17.00 per cwt., an increase of $3.52 and a record for the month. Class IV was $18.40 per cwt., an increase of $1.98 for January. March prices look even better with Class III futures trading at near $19.60 per cwt. and Class IV futures at $19.75. You can see that the market is doing the job of getting Class III in line with Class IV again.

Even though milk prices are good and look to be good, they are not having fostering much improved profitability due to high grain prices. The February milk/feed ratio was unchanged from January at 1.96. This compares to 2.36 a year earlier. Corn price in February jumped 72 cents to an average of $5.66 per bushel, with soybeans up 50 cents to an average of $12.10. At the same time, the all-milk price increased $1.70 per cwt. So basically, we are trading dollars for dollars.

The milk/feed ratio has not changed much lately, continuing to keep things tight. This brings me to the need to bring up the LGM-Dairy (Livestock Gross Margin) insurance program. This program has been around since 2008, but it’s now subsidized by the government, making it more attractive as a risk management tool. There have been many meetings on this program, and Jim Dickrell wrote about it in his article, “Dairy Margin Insurance Making More Sense,” posted online Jan. 16, 2011.

There has been a fair amount of misinformation being given out about this program. Brian Gould and Victor Cabrera from the University of Wisconsin have been doing a lot of meetings and webinars, which have been very informative and accurate. However, there are others doing seminars and are giving some misleading information.

Some have been indicating that LGM-Dairy is a replacement for forward contracting, or using futures and options to protect price. It is not a replacement. It is another tool. LGM-Dairy is just that. It protects a livestock gross margin or income over feed cost. It does not hedge milk prices nor does it hedge feed prices in and of themselves. It protects the margin between the two.

Another fallacy is that if you establish LGM-Dairy contracts you need to get out of already hedged milk and cannot use the markets to hedge any more. These are two separate things. LGM-Dairy has no bearing on whether you can use the markets. It is insurance similar to crop insurance. Those who have crop insurance regularly hedge their grain prices up to the level of coverage they have. It is a good marketing combination.

Another fallacy is that a payment will be made if any month falls below your gross margin guarantee. This may or may not happen. Your gross margin guarantee is calculated over the entire period chosen for your policy. If you choose six months, the entire period will be used to determine whether you will receive an indemnity or not. In essence, there could be two months during which the calculations would indicate a payment, but the other four months may indicate the income over feed costs was more favorable with the average of these months may resulting in no indemnity payment. Simply put, if milk prices and feed prices increase at the same ratio, there will not be a payment. If milk priced decrease and feed prices decrease at the same ratio, there may be no payment. If milk prices increase and feed prices decrease, there may be no payment. If milk prices decrease and feed prices increase, there will be a payment.

Makes sure you understand what you are doing and what you are trying to protect when initiating an LGM-Dairy contract. I promote using this as another tool that is available to protect an area of risk on your operation. Use it is conjunction with or an add-on to your marketing plan. Find an insurance agent who is well-informed about LGM-Dairy. We are licensed to write LGM-Dairy in Wisconsin and Michigan.

Upcoming reports:

- World Agricultural Supply and Demand report on March 10
- California Class I price on March 10
- Fluid milk sales on March 11
- Fonterra auction on March 15
- April Class I price on March 18
- February Milk Production report on March 18
- February Cold Storage report on March 22

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.